Your Mortgage : Sell Home Before Forced to by Foreclosure Sale

QUESTION: We have a first, second and third mortgage on our home. Due to illness and unemployment, we are behind on our payments. The second lender has begun foreclosure and the others are threatening. A friend suggests that we file bankruptcy, but I hate to do that. We have about $25,000 equity in our house. What should we do?

ANSWER: Filing bankruptcy will delay foreclosure, but it won’t solve your problem of inability to make the mortgage payments.

If you file Chapter 13, you will have to come up with a payment plan and stick to it, because failure to make the payments means the automatic stay on foreclosure can be removed and the lender can foreclose.

If you elect Chapter 7 straight bankruptcy the court will probably order your home sold (although you may be entitled to a homestead or other exemption protection for some of the sale proceeds after the mortgages are paid off).

But a better alternative might be to sell your home to save most of your equity and avoid the stigma of bankruptcy on your credit report for 10 years. For further details, consult an attorney, but don’t let yourself be pushed into filing bankruptcy unless absolutely necessary.

Mortgage Refinance Is Source of Tax-Free Cash

Q: Our adjustable-rate mortgage is up to 11.25%. A local lender advertises fixed-rate mortgages around 10%. Do you think we should refinance?

A: The general rule is it pays to refinance a mortgage if the interest rate can be reduced at least 2% and the loan costs can be repaid from monthly payment reductions within 36 months.

Although you don’t meet the criteria, you may want to refinance anyway to get rid of that undesirable ARM loan, so you can sleep better with a fixed-rate mortgage. If you have built up substantial equity in the house, another good reason you may want to refinance is to take out tax-free cash to use for investments.